Audit of Northeast Center for Youth and Families, Inc

8/4/2019 Audit of Northeast Center for Youth and Families, Inc.

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Official Audit Report Issued August 25, 2011

Northeast Center for Youth and Families, Inc.For the period July 1, 2004 through June 30, 2009

State House Room 230Boston, MA 02133 [email protected]/auditor


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2010-4538-3C TABLE OF CONTENTS/EXECUTIVE SUMMARY

i

INTRODUCTION 1

The Northeast Center for Youth and Families, Inc. (NCYF) was founded in 1976 as a non-profit human service agency for the purpose of aiding and providing specialized care andservices to delinquent and/or emotionally disturbed youths who demonstrated critical need

and had not succeeded in treatment elsewhere. NCYF was originally founded under thename Tri-County Youth Programs, Inc., but after two name changes is now called NortheastCenter for Youth and Families, Inc. Located in Easthampton, NCYF annually serves morethan 600 emotionally disturbed or mentally ill children and adolescents in Massachusetts andConnecticut through therapeutic and educational programs that include: residentialtreatment programs, in-home support services, therapeutic foster care, individualized specialeducation services, and after-school programs. For fiscal year 2009, NCYF receivedprogram funding that totaled $18,835,562, of which the Commonwealth provided$13,102,066, or approximately 70%.

The scope of our audit was to examine various administrative and operational activities ofNCYF during the period July 1, 2004 through June 30, 2009. Our audit objectives included:

(1) determining whether NCYF had implemented effective internal controls over itsoperations and (2) assessing NCYFs business practices and its compliance with applicablelaws, rules, and regulations, as well as the various fiscal and programmatic requirements of itsstate contracts.

Based on our audit, we found that during the audit period, NCYF inappropriately receivedstate contract revenues totaling $651,221; incurred questionable staff bonuses totaling$918,422 and unallowable severance pay totaling $148,098; inappropriately used $406,360 infunding it received under its Massachusetts state contracts to pay for losses it incurred inprograms it operated to serve citizens of the state of Connecticut; incurred $53,950 innonreimbursable consultant costs; incurred $7,073 in nonreimbursable hospital, medical, and wage continuation costs relative to an insurance claim made by a staff member during a

period in which NCYF had let its workers compensation insurance coverage lapse; and didnot properly account for employee retirement plan contributions totaling $260,000.Moreover, many of the unallowable expenses we identified during our audit were incurred byNCYF in an apparent effort to avoid retaining surplus state contract funds which it wouldhave had to remit to the Commonwealth in accordance with state regulations. As a result,the Commonwealth was denied the potential opportunity to fund services for other needyconsumers.

AUDIT RESULTS

1. FAILURE TO ACCURATELY REPORT PROGRAM FINANCIAL INFORMATIONRESULTED IN NCYF RECEIVING UNALLOWABLE CONTRACT PAYMENTS TOTALING

$651,221 4

During the period July 1, 2005 through June 30, 2008, NCYF operated two foster careprograms, the Nexus and Safe Passage Programs, under contracts with the statesDepartment of Youth Services (DYS). During this three-year period, these twoprograms were significantly underutilized by DYS due to a decline in DYSs overallconsumer population. Consequently, in order to help ensure the financial viability ofNCYF, DYS revised the rates of reimbursement it paid for services under these contracts


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in order to reimburse NCYF for the actual costs it incurred in operating these twoprograms. As part of this rate adjustment process, NCYF was required to submitdocumentation to DYS detailing its actual costs of operating these two programs duringthe period in question. DYS needed this information in order to properly identify anyunfunded costs within the Nexus and Safe Passage Programs and to calculate the

additional funding that NCYF needed to operate both programs without incurring afinancial loss. However, we found that NCYF did not submit documentation to DYSthat detailed its actual costs for operating these two programs. Rather, during fiscal year2006, NCYF provided DYS with a schedule showing the revenues it would have receivedin these two programs during this fiscal year if they were fully utilized less an estimate ofsome of the cost savings NCYF would realize in these programs from thisunderutilization. DYS used this information to adjust the fiscal year 2006 unit rates forthe Nexus and Safe Passage Programs. Also, DYS adjusted NCYFs fiscal years 2007and 2008 unit rates for these programs without receiving NCYFs actual costs ofoperating these two programs. As a result, NCYF received reimbursements from DYSthat exceeded its actual costs by $651,221 during our audit period, which representunallowable costs under these contracts.

2. QUESTIONABLE ADMINISTRATION OF EMPLOYEE BONUSES TOTALING $918,422 10

Between fiscal years 2006 and 2008, NCYF provided $918,422 in bonuses ranging from$48 to $7,500 to its employees. However, although NCYF developed plans to distributestaff bonuses, it did not have a written policy that provided for these payments nor didstaff employment agreements provide for bonuses. According to state regulations, thereare two ways to furnish bonuses to employees: (a) through a fixed bonus as part of anemployees salary based upon terms incorporated into his or her written employmentagreement or (b) through a contractors written employee morale, health, and welfarepolicy, which makes available bonuses to all employees based upon exceptionalperformance. Since NCYF met neither of these provisions, it did not properly

administer the $918,422 that it expended on these employee bonuses. Moreover, wefound that these bonuses were provided in a discriminatory manner. Specifically, 18 of174 employees, or approximately 10%, received bonuses that were greater than themaximum amount agreed upon by NCYFs senior management team for fiscal year 2007.Also, during fiscal year 2006, an employee requested that her bonus be treated as a salaryincrease rather than a one-time payment. NCYF approved the employees request, butoffered no such benefit to anyone else at NCYF. Finally, the Massachusetts Office ofthe Attorney General has issued a publication, The Attorney Generals Guide for BoardMembers of Charitable Organizations (Guide), to help board members of charitablecorporations and associations in the exercise of their important responsibilities. According to the Guide, the Boards fiduciary responsibilities include, among other

things, setting the compensation, including bonuses, of the Executive Director and othersenior managers. We found however, that NCYFs Board of Directors did not approvebonus payments that were made to NCYFs senior management staff. Consequently,NCYFs Board did not fulfill this aspect of its fiduciary oversight responsibilities to theorganization, the organizations donors, and the Commonwealth.


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3. NCYF IMPROPERLY UTILIZED STATE PROGRAM REVENUES TOTALING $406,360TO FUND OUT-OF-STATE PROGRAMS 20

According to state regulations the revenue NCYF receives under its contracts withMassachusetts state agencies may only pay for expenses associated with the operation ofthe programs that are funded by these contracts. In addition, allowable surplus state

revenues retained by providers are public revenues and therefore they may only beexpended for activities and programs that are in keeping with the Massachusettscharitable purposes of the provider organization. Despite these requirements, our auditidentified that between fiscal years 2006 and 2009, NCYF used revenues totaling$406,360 that it received under its Massachusetts contracts to fund losses that it incurred within programs it operated in the state of Connecticut. Since this $406,360 did notbenefit consumers in NCYFs Massachusetts programs, NCYFs use of these contractrevenues for these purposes represents unreasonable and unallowable costs against itsstate contracts.

4. NCYF DID NOT PROPERLY REPORT UNALLOWABLE SEVERANCE PAYMENTSTOTALING $148,098 IN THE FINANCIAL STATEMENTS IT FILED WITH THE

COMMONWEALTH 24

Between fiscal years 2005 and 2009, NCYF provided severance pay to nine employeesthat totaled $198,280. The individual severance amounts, which included a combinationof extended medical insurance coverage, bonuses, and salary payments, ranged inamounts from $5,471 to $53,784. However, NCYFs policies and procedures did notprovide for the provision of severance pay. Consequently, based upon state and federalregulations, these payments represent nonreimbursable costs to the Commonwealth. Inaddition, our analysis of these nine severance packages identified significant disparitiesbetween the severance compensation that was provided to these individuals. Forexample, when a former Director of Program Services left NCYF during fiscal year 2008,

she received six months in paid medical insurance benefits ($5,471) as her severancecompensation. In contrast, when a former Chief Financial Officer left NCYF duringfiscal year 2009, he received four months of his salary ($34,961) plus a $5,000 bonus ashis severance compensation. Finally, we found that even though the severance paymentsin question were nonreimbursable expenses, NCYF only disclosed the severancepayments it made during fiscal year 2009 ($39,961) and a portion of its fiscal year 2007payments ($10,221) as nonreimbursable expenses during these fiscal years. NCYFreported the remaining $148,098, or 75%, in the financial statements it filed with theCommonwealth as allowable personnel costs rather than nonreimbursable costs.

5. NONREIMBURSABLE CONSULTANT COSTS TOTALING $53,950 30

During the audit period, NCYF paid four consultants a total of $303,168 for educational,business, and legal consulting services, of which $53,950 represents nonreimbursablecosts to the Commonwealth. Based on our review of the records that NCYF maintainedrelative to these services, we noted in several instances that NCYF failed to enter intoformal written agreements with the consultants that clearly defined the duties andresponsibilities of each party. As a result, NCYF lacked a mechanism to monitor eachcontractors performance and to protect itself from any legal issues (e.g., claims fornonperformance of services, liability claims for any property damage or personal injury)


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that could arise. In addition, in several instances NCYF did not require these consultantsto submit supporting documentation to substantiate what services, if any, they provided.Finally, NCYF awarded one consultant contract to a current NCYF employee inviolation of both state regulations and federal cost principles for non-profit agencies.

6. LAPSE IN WORKERS COMPENSATION INSURANCE RESULTED IN UNALLOWABLE

INSURANCE CLAIMS PAYMENTS TOTALING $7,073 37

Chapter 152, Section 25A, of the Massachusetts General Laws requires all employers tomaintain workers compensation insurance. However, we found that during fiscal year2007, NCYF did not pay its premium for its workers compensation policy until 41 daysafter it was due, which caused it to lapse. During the period that NCYF operated without workers compensation insurance, an employee of NCYF was injured on the job andrequired medical attention at a local hospital. The accident resulted in hospital, medical,and wage continuation costs for the employee totaling $7,073. Because NCYF did nothave workers compensation insurance coverage at the time of the accident, NCYF wasresponsible for paying the employees medical expenses and lost wages. According tostate regulations, expenses such as these that are unreasonable and unnecessary arenonreimbursable under state contracts.

7. NCYF DID NOT PROPERLY ACCOUNT FOR EMPLOYEE RETIREMENT PLANCONTRIBUTIONS TOTALING $260,000 40

During the period covered by our audit, NCYF offered a retirement plan to all itsemployees. Under this plan, employees make their own contributions. The plan alsorequires NCYFs Board of Directors to determine annually what amount, if any, NCYFwill contribute to the plan on behalf of its eligible employees. Between fiscal years 2006and 2009, NCYFs Board only authorized one employer contribution to this plan which,according to NCYFs records, was a lump sum contribution of $260,000 during fiscalyear 2007. Our review of the documentation NCYF was maintaining relative to this

contribution identified that while NCYF recorded and reported this contribution astaking place during fiscal year 2007, NCYFs Board of Directors did not authorize thiscontribution until November 13, 2007, or approximately five and one half months afterthe close of fiscal year 2007. Also, NCYF did not remit the $260,000 payment to theplans trustee until February 6, 2008, or approximately seven months after the close offiscal year 2007. Clearly, since all the events pertinent to this transaction occurred afterthe close of fiscal year 2007, NCYFs $260,000 payment represents a reimbursable costto the Commonwealth for the fiscal year 2008, and not fiscal year 2007.

APPENDIX 44

Schedule of Identified Recoverable Costs 44


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2010-4538-3C INTRODUCTION

1

INTRODUCTION

Ba c kg r oundThe Northeast Center for Youth and Families, Inc. (NCYF) was founded in 1976 as a non-profit

human service agency for the purposes of aiding and providing specialized care and services to

delinquent and/or emotionally disturbed youths who demonstrated critical need and had not

succeeded in treatment elsewhere. NCYF was originally founded under the name Tri-County Youth

Programs, Inc., but after two subsequent name changes is currently known as the Northeast Center

for Youth and Families, Inc. Located in Easthampton, NCYF annually serves more than 600

emotionally disturbed or mentally ill children and adolescents in Massachusetts and Connecticut

through therapeutic and educational programs that include residential treatment programs, in-home

support services, therapeutic foster care, individualized special education services, and after-school

programs. According to the financial statements that NCYF filed with the Commonwealth, NCYF

received funding from various sources during our audit period, as indicated in the table below:

Fiscal Year

Funding Source 2005 2006 2007 2008

Commonwealth of Mass.

2009

$7,773,218 $7,676,939 $8,282,650 $8,451,345 $7,985,244

Mass. Local Govt./Quasi-Govt.Entities

3,489,459 3,938,465 4,200,241 4,121,630 4,036,734

Medicaid 206,782 425,714 522,449 654,673 954,452

Mass. Govt. Client Stipends 103,700 99,685 130,632 140,598 125,636

Non-Mass. State/Local Govt. 5,039,558 4,020,509 3,840,627 5,603,124 5,544,772

Client Resources 61,133 46,872 35,648 27,639 45,180

Mass. Publicly Sponsored ClientOffsets

334,072 112,253 61,786 63,600 96,000

Contributions and Other 237,390 105,143 47,841 74,961

Total

47,544

$17,245,312 $16,425,580 $17,121,874 $19,137,570 $18,835,562


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Aud i t S cope , Ob j ec t i ve s , and M e thodo logyThe scope of our audit was to examine various administrative and operational activities of NCYF

during the period July 1, 2004 through June 30, 2009. We conducted this performance audit in

accordance with generally accepted government auditing standards. Those standards require that we

plan and perform the audit to obtain sufficient, appropriate evidence that provides a reasonable

basis for our findings and conclusions based on our audit objectives. We believe that the evidence

obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Our audit objectives consisted of the following:

1. To determine whether NCYF had implemented effective internal controls, including: Processes for planning, organizing, directing, and controlling program operations; Policies and procedures to ensure that resource use is consistent with laws and regulations;

and

Policies and procedures to ensure that resources are safeguarded and efficiently used.2. To assess NCYFs business practices and its compliance with applicable laws, rules, and

regulations, as well as the various fiscal requirements of its local service contracts.

In order to achieve our objectives, we first assessed the internal controls established and

implemented by NCYF over its operations. The purpose of this assessment was to obtain an

understanding of managements attitude, control environment, and the flow of transactions through

NCYFs accounting system. We used this assessment in planning and performing our audit tests.

We then held discussions with NCYF officials and reviewed organization charts; internal policies

and procedures; and applicable laws, rules, and regulations. We also examined NCYFs financial

statements, budgets, cost reports, and invoices to determine whether expenses incurred were

reasonable; allowable; allocable; properly authorized and recorded; and in compliance with

applicable laws, rules, and regulations.

Our audit was not conducted for the purposes of expressing an opinion on NCYFs financial

statements. We also did not assess the quality and appropriateness of program services provided by

the NCYF under its state contracts. Rather, our objective was to report findings and conclusions on

the extent of NCYFs compliance with applicable laws, rules, regulations, and contractual


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agreements and identify processes, methods, and internal controls that could be made more efficient

and effective.

Based on our audit, we found that during the audit period, NCYF inappropriately received state

contract revenues totaling $651,221; incurred questionable staff bonuses totaling $918,422 andunallowable severance pay totaling $148,098; inappropriately used $406,360 in funding it received

under its Massachusetts state contracts to pay for losses it incurred in programs it operated to serve

citizens of the state of Connecticut; incurred $53,950 in nonreimbursable consultant costs; incurred

$7,073 in nonreimbursable hospital, medical, and wage continuation costs relative to an insurance

claim made by a staff member during a period in which NCYF had let its workers compensation

insurance coverage lapse; and did not properly account for employee retirement plan contributions

totaling $260,000. Moreover, many of the unallowable expenses we identified during our audit were

incurred by NCYF in an apparent effort to avoid retaining surplus state contract funds which it

would have had to remit to the Commonwealth in accordance with state regulations. As a result, the

Commonwealth was denied the potential opportunity to fund services for other needy consumers.

At the conclusion of our audit, NCYF was provided with a draft copy of our report for its review

and comments. The comments provided by NCYF are either included in this report or were

considered and resulted in changes to our final report.


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2010-4538-3C AUDIT RESULTS

4

AUDIT RESULTS

1. FAILURE TO ACCURATELY REPORT PROGRAM FINANCIAL INFORMATION RESULTED INNCYF RECEIVING UNALLOWABLE CONTRACT PAYMENTS TOTALING $651,221

During the period July 1, 2005 through June 30, 2008, NCYF operated two foster care

programs, the Nexus and Safe Passage Programs, under contracts with the states Department of

Youth Services (DYS). During this three-year period, these two programs were significantly

underutilized by DYS due to a decline in DYSs overall consumer population. Consequently, in

order to help ensure the financial viability of NCYF, DYS revised the rates of reimbursement

for services within these contracts in order to reimburse NCYF for the actual costs it incurred in

operating these two programs. As part of this rate adjustment process, NCYF was required to

submit documentation to DYS detailing its actual costs of operating these two programs during

the period in question. DYS needed this information in order to properly identify any unfundedcosts within the Nexus and Safe Passage Programs and to calculate the additional funding that

NCYF needed to operate both programs without incurring a financial loss. However, we found

that NCYF did not submit documentation to DYS that detailed its actual costs for operating

these two programs. Rather, during fiscal year 2006, NCYF provided DYS with a schedule

showing the revenues it would have received in these two programs during this fiscal year if they

were fully utilized, less an estimate of some of the cost savings NCYF would realize in these

programs from this underutilization. DYS used this information to adjust the fiscal year 2006

unit rates for the Nexus and Safe Passage Programs. Also, DYS adjusted NCYFs fiscal years

2007 and 2008 unit rates for these programs without receiving NCYFs actual costs of operating

these two programs. As a result, NCYF received reimbursements from DYS that exceeded its

actual costs by $651,221 during our audit period, which represent unallowable costs under these

contracts.

During the period July 1, 2005 through June 30, 2008, NCYF contracted with DYS to annually

provide 10,585 units of traditional foster care services within its Nexus Program. Under the

terms and conditions of this contract, NCYF received a total of $82 for each unit of service

provided (a unit of service equals one day of foster care for a DYS consumer), of which NCYF

retained $52 per unit and provided the remaining $30 per unit to the foster family.

During this same three-year period, DYS also provided NCYF with a contract to operate its Safe

Passage Program. Under this contract, NCYF was required to provide intensive foster care for


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DYS consumers. For fiscal year 2006, NCYFs Safe Passage Program contract authorized 8,760

units of service; however, the number of its authorized units declined to 6,205 annually for fiscal

years 2007 and 2008. The consumers placed in the Safe Passage Program require more

specialized care than those clients placed in the Nexus program. Consequently, NCYF receives

a greater unit rate from DYS ($112 per unit) for these more intensive foster care services. Of

this total fee, NCYF retains $62 for program administration while the foster parent receives the

remaining $50. The table provided below details the payment terms and service levels detailed in

NCYFs Nexus and Safe Passage Programs contracts for the period July 1, 2005 to June 30,

2008.

Nexus Program Safe Passage Program

UnitsFiscal Year

Authorized

MaximumUnit Rate Units

Obligation Authorized

MaximumUnit Rate

2006

Obligation

10,585 $82 $867,970 8,760 $112 $981,120

2007 10,585 $82 $867,970 6,205 $112 $694,960

2008 $8210,585 $867,970 $1126,205

Total

$694,960

31,755 $2,603,910 21,170 $2,371,040

As detailed in the table above, the Nexus and Safe Passage Programs were authorized to provide

a total of 31,755 and 21,170 units of foster care, respectively, from July 1, 2005 to June 30, 2008.However, according to DYS and NCYF officials, DYS incurred a reduction in its overall

consumer census that led to a significant underutilization of NCYFs two foster care programs

during this period. Specifically, the Nexus program provided only 18,302 units of traditional

foster care while the Safe Passage Program provided 11,514 units of intensive foster care during

this three-year period. Thus, the average utilization rate for these programs was 58% and 54%,

respectively, during this period. The table below details DYSs underutilization of NCYFs

Nexus and Safe Passage Programs from July 1, 2005 to June 30, 2008.


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Nexus Program Safe Passage Program

UnitsFiscal YearAuthorized

UtilizationUnits Served UnitsRate (%) Authorized

UtilizationUnits Served

2006

Rate (%)

10,585 6,621 63% 8,760 5,218 60%

2007 10,585 5,770 55% 6,205 3,513 57%

2008 10,585 5,911 56% 6,205 2,783

Total

45%

31,755 18,302 58% 21,170 11,514 54%

In order to address this underutilization issue, on May 16, 2006 the Commissioner of DYS sent

a letter to several of its contracted human service providers, including NCYF, in which the

Commissioner stated that DYS was offering its foster care providers the opportunity to convert

their unit rate contracts to cost reimbursement contracts. Under a cost reimbursement contract,

providers are reimbursed for the actual costs of the services they provide. The Commissioners

letter states, in part:

DYS is obligated only to pay for the units utilized. However, the current practice withinthe Commonwealth is to convert, where appropriate, underutilized unit rate contracts tocost reimbursement contracts to reflect the actual allowable expenses incurred during thecontract period. The conversion to a cost reimbursement contract recognizes that thefixed costs remain the same (facility costs and proportional administrative overhead)whether the program operates at 60% or 100% utilization and that unit related costs

such as food supplies and staffing decline in proportion to the drop in census. If youhave a program with a utilization rate less than your contract utilization rate, and theunderutilization was related to a drop in the DYS population, you can request that your

unit rate contract be converted to a cost reimbursement contract.

The Commissioners offer to change the terms of NCYFs contracts, which extended through

fiscal year 2008, provided NCYF with an opportunity to operate its Nexus and Safe Passage

Programs without incurring any losses, despite experiencing a significant underutilization of its

foster care services. In order to effect this change, DYS increased the unit rates for the services

NCYF provided under these contracts in order to allow NCYF to recover the actual allowable

expenses it incurred in operating these programs. As part of the rate adjustment process, NCYF

was required to submit documentation to DYS to support its actual costs of operating these

programs. DYS needed this information in order to identify any unfunded costs within the

Nexus and Safe Passage Programs and to calculate the additional funding that NCYF needed to

operate both programs without incurring profits or losses.


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However, our audit found that NCYF did not submit documentation to DYS that detailed its

actual costs for operating the Nexus and Safe Passage programs. During fiscal year 2006, NCYF

provided DYS with a schedule showing the revenues it would have received in these two

programs during this fiscal year if these programs were fully utilized, less an estimate of some of

the cost savings NCYF would realize in these programs from this underutilization. DYS used

this schedule to adjust the fiscal year 2006 unit rates for the Nexus and Safe Passage programs.

Also, DYS adjusted NCYFs fiscal years 2007 and 2008 unit rates for these programs without

receiving NCYFs actual costs of operating these two programs. Because NCYF did not report

its actual costs under the Nexus and Safe Passage Programs during these three fiscal years, it

received unallowable contract payments from DYS that totaled $651,221 in these programs.

This amount represents the difference between the actual costs that NCYF incurred under these

programs, or $3,012,866, and the total contract payments (earned revenue plus additionalpayments) it received from DYS, or $3,664,087. The table below details the unallowable

payments that NCYF received through the Nexus and Safe Passage Programs over the three-

year period ending June 30, 2008.

Nexus Program

Fiscal Year Earned Revenue Additional Revenue Total DYS Revenue Actual Costs

2006

Unallowable Payments

$527,867 $233,152 $761,019 $659,965 $101,054

2007 453,055 180,257 633,312 481,767 151,545

2008 476,373 109,505 585,878 635,0431

Total

(49,165)

$1,457,295 $522,914 $1,980,209 $1,776,775 $203,434

Safe Passage Program

Fiscal Year Earned Revenue Additional Revenue Total DYS Revenue Actual Costs

2006

Unallowable Payments

$580,228 $150,125 $730,353 $450,835 $279,518

2007 398,343 118,081 516,424 401,621 114,803

2008 313,264 123,837 437,101 383,635

Total

53,466

$1,291,835 $392,043 $1,683,878 $1,236,091 $447,787

1 TheActual Costsdetailed in the table above, except for fiscal year 2008, were obtained directly from NCYFs annual UFR. For fiscalyear 2008, NCYF had overstated salaries within the Nexus and Safe Passage Programs by approximately $71,544 and $145,234,respectively, due to a flawed cost allocation plan utilized by the Agency. Therefore, we needed to reduce the reported costs of theseprograms by the overstated amounts in order to accurately calculate NCYFs overpayment for fiscal year 2008. In order to makethese adjustments, we obtained from the Nexus and Safe Passage Program Director her best estimate of employees time that wasdedicated to these programs. NCYFs Chief Financial Officer stated that prior to January 2010, payroll expenses were allocatedbased upon a pre-set percentage which did not reflect the actual percentage of staff time in various programs. The CFO stated thatthe problem has been corrected, and now staff time is allocated based upon actual time and attendance records. NCYFs ExecutiveDirector confirmed that the Centers time allocation plan was flawed prior to January 2010.


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During our audit, we discussed these matters with DYS officials and NCYFs current Chief

Financial Officer (CFO), who was not employed by NCYF during the period in question.

NCYFs CFO told us that her predecessor submitted information to DYS that appeared to be

intended to recover NCYFs estimate of its lost revenues as opposed to the actual expenses

NCYF incurred in its Nexus and Safe Passage Programs. DYSs Director of Purchased Services

stated that DYS believed that NCYFs fiscal year 2006 data submission represented the actual

costs of the Nexus and Safe Passage Programs during fiscal year 2006 and DYS decided to use

the method used by NCYF in this calculation for fiscal years 2007 and 2008. However, DYSs

Chief Financial Officer stated that in retrospect, DYS should have reconciled NCYFs submitted

information to NCYFs yearly financial statements to ensure that DYSs payments under these

two contracts were allowable.

Rec om m end a t i o nIn order to address our concerns relative to this matter, the Commonwealth should recover

from NCYF the $651,221 in excess revenues it received from DYS during the three fiscal years

ended June 30, 2008 under the contracts in question.

Aud i t ee s ResponseIn response to this issue, NCYF officials provided comments which are excerpted below:

The Centers billing under contracts with DYS for the Centers Nexus and Safe PassagesPrograms was in compliance with the terms of those contracts, and all reporting with

respect to those programs was in compliance with the requirements of theCommonwealths Operational Services Division (OSD). Accordingly, no funds with

respect to these programs are recoverable by the Commonwealth.

The Draft Report criticizes the Center for not submitting to DYS detail as to the Centers

actual costs in operating its Nexus and Safe Passages programs. However, this type ofcost data was not requested by DYS. Instead, the Center was asked to provide, and didprovide, data that showed the Centers costs as originally projected and adjustments forsavings that resulted from lower utilization. The latter consisted of reduced payments forfoster parents and reduced costs for temporary help, staff mileage, program supplies and

administrative costs. On the basis of this data, DYS and the Center negotiated revisedunit rates that were reflected in contract amendments as discussed above.

Aud i to r s Rep l yIn its response, NCYF asserts that its billings for the program services in question were in

compliance with the terms of the contracts that funded these programs. However, while we do

not dispute the fact that NCYF billed for these program services at the established rates, the


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process used to establish these rates was flawed. As stated in our report, DYS asked NCYF to

provide it with a summary of the actual allowable costs NCYF incurred in operating these

programs in order to accurately adjust the rates of reimbursement it was paying for these

services to allow NCYF to recover the actual costs it incurred in operating these programs

during the period in question. NCYF did not comply with the request and as a result, DYSs

rate adjustments for these programs resulted in NCYF receiving amounts greater than its actual

cost to operate these two programs. Clearly, DYSs attempt to adjust these rates was a good

faith effort to help providers, including NCYF, minimize any financial hardships they may be

incurring by operating DYSs programs during periods of program underutilization. It was not

intended to afford providers an opportunity to generate excessive profits such as the $651,221

realized by NCYF under these contracts.

In its response, NCYF states that DYS did not request the actual costs in operating its Nexus

and Safe Passage Programs. However, this statement is untrue. The DYS Commissioners letter

dated May 16, 2006, which was the basis for DYS amending the unit rates for the Nexus and

Safe Passage Programs, specifically required that NCYF submit its actual costs to DYSs

Director of Purchase Services. The Commissioners letter states, in part, the following:

If your contract is within one of the above categories and you would like DYS to consideran amendment to the contract, you must submit your request to the Director of PurchaseServices no later than Tuesday, May 23, 2006. You will need to provide documentation

to support your actual costs and each request will be reviewed and approved or rejectedby DYS.

In addition, during the audit we spoke to DYSs Director of Purchase Services about this matter.

The Director stated that the schedule submitted by NCYF was thought to contain the actual

costs of the Nexus and Safe Passage Programs for fiscal year 2006. Moreover, the Director

stated that the submitted documents were the basis for adjusting the unit rates for these

programs. As noted within the report, DYSs Chief Financial Officer stated that in retrospect,

DYS should have reconciled the information NCYF submitted to its yearly financial statements

to ensure that DYS payments under these two contracts were allowable.

In its response, NCYF contends that it was asked by DYS officials to provide data that showed

the Centers costs as originally projected and adjustments for savings that resulted from lower

utilization. However, NCYF did not provide us with any documentation to substantiate this


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assertion. Moreover, this assertion is contrary to what the DYS Commissioner stated in the

aforementioned letter and all the other evidence we gathered during our audit.

2. QUESTIONABLE ADMINISTRATION OF EMPLOYEE BONUSES TOTALING $918,422Between fiscal years 2006 and 2008, NCYF provided $918,422 in bonuses ranging from $48 to

$7,500 to its employees. However, although NCYF developed plans to distribute staff bonuses,

it did not have a written policy that provided for these payments nor did staff employment

agreements provide for bonuses. According to state regulations, there are two ways to furnish

bonuses to employees: (a) through a fixed bonus as part of an employees salary based upon

terms incorporated into his or her written employment agreement or (b) through a contractors

written employee morale, health, and welfare policy, which makes available bonuses to all

employees based upon exceptional employee performance. Since NCYF met neither of these

provisions, it did not properly administer the $918,422 that it expended on these employee

bonuses. Moreover, we found that these bonuses were provided in a discriminatory manner.

Specifically, 18 of 174 employees, or approximately 10%, received bonuses that were greater

than the maximum amount agreed upon by NCYFs senior management team for fiscal year

2007. Also, during fiscal year 2006, an employee requested that her bonus be treated as a salary

increase rather than a one-time payment. NCYF approved the employees request, but offered

no such benefit to anyone else at NCYF. Finally, the Massachusetts Office of the Attorney

General has issued a publication, The Attorney Generals Guide for Board Members of

Charitable Organizations (Guide), to help board members of charitable corporations and

associations in the exercise of their important responsibilities. According to the Guide, the

Boards fiduciary responsibilities include setting the compensation (including bonuses) of the

Executive Director and other senior managers. We found, however, that NCYFs Board of

Directors did not approve bonus payments that were made to NCYFs senior management staff.

Consequently, NCYFs Board did not fulfill this aspect of its fiduciary oversight responsibilities

to the organization, the organizations donors, and the Commonwealth.

Under 808 CMR 1.00, the Executive Office for Administration and Finance, Operational

Services Division (OSD), issued its Uniform Financial Statements & Independent Auditors

Report (UFR), Auditors Compliance Supplement. This document assists Departments and

Contractors in making the determinations necessary for deciding what are reimbursable


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operating costs under 808 CMR 1.02 and 808 CMR 1.05 in Commonwealth state-sponsored

vendor programs. Regarding employee bonuses, the Auditors Compliance Supplement states,

in part, the following:

Bonuses are not considered a fringe benefit; rather, they are properly classified as asalary allowance when attributable to services rendered by an employee. Bonuses arenegotiable items, which are added to salaries in the budget and in the financialstatements. The net salary amounts must not exceed what is considered reasonablecompensation to be reimbursable. There are two ways to furnish bonuses to employees:one is a fixed bonus as part of an employees salary based on terms incorporated into hisor her written employment agreement, and the second is through a Contractors writtenemployee morale, health and welfare policy, which makes available bonuses to allemployees based on exceptional employee performance. See section 162 of the InternalRevenue Code and 808 CMR 1.05(20) for further guidance.

Based on the guidance provided in the Auditors Compliance Supplement, staff bonuses are

allowable expenses under state contracts, as long as they are reasonable and part of anemployees written employment agreement or included in an organizations written employee,

morale, health and welfare policy which makes bonuses available to staff based on exceptional

performance. The requirement that a provider has to have a written employee morale, health

and welfare policy is the control implemented by the Commonwealth to ensure that staff

bonuses paid for with public funds are provided to individuals in a fair and equitable manner. .

Consequently, in order to use state funds to provide staff bonuses, NCYF was required to

establish an employee morale, health, and welfare policy authorizing bonuses for all employees

based upon exceptional employee performance.. Such a policy should include specific details

such as the financial circumstances under which NCYF may award bonuses, employee eligibility,

performance criteria, bonus levels, bonus adjustments, and distribution dates. More importantly,

the policy has to be adopted by NCYFs Board of Directors since the Board is ultimately

responsible for ensuring that NCYF operates in a fiscally sound manner.

However, as of the close of our audit fieldwork, NCYFs Board had not adopted such a policy,

and NCYF did not have a functioning employee appraisal system necessary to identify

exceptional employee performance and justify the awarding of any bonuses. Lastly, we reviewed

NCYFs employee agreements and determined that they did not provide for a fixed bonus as

part of any employees salary.

Despite this, during the period covered by our audit, NCYF provided members of its staff with

$918,422 in bonuses, as follows:


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Fiscal Year Employees Bonuses Average Bonus

2006

Range of Bonuses

197 $303,219 $1,539 $141 to $2,250

2007 174 271,770 $1,562 $250 to $6,617

2008 122 $2,815343,433 $48 to $7,500

Total $918,422

Since state funds were used to provide these bonuses, NCYF must adhere to the state

regulations that govern the provision of these bonuses. A description of the specific problems

we found relative to these bonuses appears in the following sections.

F is c a l Y e ar 2006 Bonu s Aw a r d sDuring fiscal year 2006, NCYF awarded bonuses to all 197 employees that totaled $303,219.

This amount was comprised of two basic bonus levels: $1,000 for employees covered by a

collective bargaining agreement (CBA), and $2,250 for employees not covered by a CBA.

NCYF reduced these bonuses for part-time employees as well as any employee hired after the

beginning of fiscal year 2006. These adjustments resulted in employees receiving bonuses that

ranged from $141 to $2,250 during this fiscal year.

NCYF developed an internal document detailing its fiscal year 2006 employee bonus program

that included two sections: (a) qualifications for receipt of bonus, and (b) bonus calculation.

However, the document was not signed, dated, or approved by NCYFs Board of Directors.

Moreover, the document specified that bonuses would be based upon merit and must be earned

by exceeding job requirements as determined by each employees immediate supervisor.

However, NCYF did not have a functioning employee evaluation system and simply provided

bonuses to all employees based upon employment longevity. Consequently, the plan neither

represents an established policy of NCYF as required by the Auditors Compliance Supplement,

nor provides a valid basis for NCYFs fiscal year 2006 bonus awards. Further, this document

included a provision that provided preferential treatment for one employee. Specifically, NCYFapproved an employees request to have her bonus treated as a salary increase, as follows:

There exists a singular exemption to this calculation, a Foster Care case manager whoelected to receive the majority of the bonus to which she would have been entitled as asalary increase instead. This exception was made at the special request of this employee.


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NCYFs current Executive Director stated that he was unaware of this special exception and was

unable to identify the individual involved in this matter.

F is c a l Y e ar 2007 Bonu s Aw a r d s The Office of the Massachusetts Attorney General has issued a publication, The Attorney

Generals Guide for Board Members of Charitable Organizations (Guide), to help board

members of charitable corporations and associations in the exercise of their important

responsibilities. The Guide specifies that board members are responsible for governing the

charity as it carries out its charitable mission. Regarding financial matters, the Guide specifies

that board members have primary responsibility for making sure that the charity is financially

accountable, has mechanisms in place to keep it fiscally sound, operates in a fiscally sound

manner, and is properly using any restricted funds it may have. According to the Guide, the

Boards fiduciary responsibilities include, among other things, setting the compensation,

including bonuses, of the Executive Director and other senior managers.

During fiscal year 2007, NCYFs senior management team informed NCYFs Board of Directors

about its intentions to award staff bonuses. However, the Board determined it was not its

responsibility to approve these bonuses. Detailed below are excerpts from the minutes of the

May 30, 2007 meeting of the Finance Committee of NCYFs Board of Directors detailing both

the senior management teams plans for awarding employee bonuses as a means to avoid

remitting any surplus state contract revenues to the Commonwealth, and the Boards decision to

limit its involvement in the approving of these staff bonuses:

[Board of Directors] discussed their plans for managing the surplus expected for this year, sothat we do not meet or exceed the state maximum. They are considering small bonuses forstaff. It will likely be an equal amount across the board, given that the performanceevaluation process has not been entirely operationalized, but hopefully this will be the lastyear any bonuses would be calculated in that way.

Discussion followed, including whether the Board needs to approve bonuses. Consensus was

that the Board should be informed of, but should not approve the bonuses, as it is an

operational decision.

Clearly, the Boards decision to abstain from approving the fiscal year 2007 employee bonuses

reflects a misunderstanding on the Boards part about its fiduciary responsibilities to the

organization, the organizations donors, and the Commonwealth.


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NCYFs senior management team met on several occasions to discuss and ultimately approve

bonus levels for fiscal year 2007. In this regard, the senior management teams reports to the

Board of Directors dated June 5, 2007 and June 7, 2007, respectively, state the following:

Due to the projected surplus for this fiscal year, the management team is considering modestbonuses for staff, and possibly a contribution to the retirement plan.

The Agency will also give staff bonuses again this year, likely in the $1,500 range, with thesame eligibility criteria as last year.

In addition, we reviewed the notes maintained by NCYFs Executive Director regarding

meetings with the senior management team that indicated that the senior management team had

established that employees covered by a CBA would receive up to $1,000 and employees not

covered by a CBA would receive up to $2,000 during fiscal year 2007. However, 18 of the 174

employees, or approximately 10%, received bonuses greater than the maximum level ($2,000)

authorized by the senior management team. While some of the variances were relatively small,

some employees received bonus payments that greatly exceeded the $2,000 limit, as detailed in

the table below:

Title Bonus Payment Excess Bonus Payment

Director Program Services $6,617 $4,617Director of Human Relations 5,180 3,180

Administrative Assistant I 4,321 2,321

Comptroller/CFO 4,121 2,121Director of Educational Services 4,067 2,067Case Manager Supervisor 3,893 1,893Program Director 2,829 829Human Resource Assistant 2,507 507Clinician 2,384 384Shift Manager 2,373 373Case Manager Supervisor 2,307 307Shift Manager 2,251 251Case Manager 2,087 87Case Manager 2,082 82Information Systems Manager 2,052 52

Shift Manager 2,044 44Residential Manager 2,033 33Case Manager 2,009Total

9$55,157 $19,157


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As previously noted, the Commonwealth established regulations for providers to follow when

employee bonuses are awarded in order to prevent discriminatory application of bonus

programs. NCYFs failure to award its fiscal year 2007 bonus based upon written employee

morale, health, and welfare policy led to the inequitable staff bonus described in the table above.

During the audit, we brought this matter to the attention of NCYFs Chief Financial Officer

(CFO). The CFO, who was not employed by NCYF during fiscal year 2007, contacted other

senior management employees and Board members in order to identify the cause of the issues

we had identified in this area. Provided below are excerpts from a document the CFO provided

to us after inquiring about the excess bonus payments in question.

NCYFs Executive Director stated that he was not aware of anyone other than his Administrative Assistant receiving a bonus greater than the agreed-upon limit of $2,000during this fiscal year. The Executive Director stated that the plan that he had endorsed anddiscussed with the Board of Directors and Finance Committee limited the bonus to amaximum of $2,000.

NCYFs Director of Educational Services stated that the prior CFO had met with him aloneand told him that since NCYF could not give him a salary adjustment, his bonus reflectedthe additional work he had assumed when the prior director left NCYF. The Director ofEducational Services had always assumed that these matters had previously been discussedwith the Executive Director and the other senior management team members.

NCYFs Board President stated that he recalled many discussions involving levels of bonuspayments among the finance committee and Board. He recalls the levels of $1,000 and$2,000 being discussed but no mention was ever made as to whether any staff member wasto receive additional bonus compensation.

NCYFs Administrative Assistants recollection of why she received a larger bonus amount was that she was being compensated for having to pay more for health insurance whenNCYF changed its plan.

F is c a l Y e ar 2008 Bonu s Aw a r d sDuring this fiscal year, NCYFs senior management team developed the following plan for

disbursing bonuses to employees:

A bonus based on duration of service over a year; 7.5% of base salary with a minimum of$2,500 for a full year employee and a maximum of $7,500 payable in three installments,

August, October and December.


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In addition, NCYFs former CFO supplemented the requirements for staff participation in this

plan in an August 6, 2008 e-mail to NCYFs payroll department, in which he instructed the

payroll department that in order for an employee to receive an installment payment, the

employee needed to be actively employed as of the first day of August, October, and December

2008.

However, we found that NCYF provided preferential treatment for a former Senior Case

Manager who resigned from her position effective June 6, 2008. Since the former Senior Case

Manager was not actively employed by NCYF as of August 1, 2008, she was not entitled to

receive any of the three planned bonus installments. In fact, based upon the senior management

teams meeting minutes dated August 27, 2008, the team appeared committed to excluding the

Senior Case Manager from any bonus distribution. Specific excerpts from these minutes are

provided below:

Message was received from the Senior Case Manager looking to be given the bonus. TheSenior Case Manager knows of others who were given the bonus after they left. The Directorof Human Relations feels the bonus was not part of benefit package as she agreed to a

specific package and ceased being an employee in June. The CFO stated if the agency wereto pay the bonus it would cost approximately $1,200 and the Director of Human Relationsstated it set a precedent.

Yet, contrary to the advice provided by the Director of Human Relations on this matter, as well

as the sentiments offered by the Executive Director, NCYF provided the former Senior Case

Manager a bonus totaling $1,136 on September 3, 2008. Clearly, the final action taken by NCYF

on this case was contrary to the bonus plan developed by the senior management team and the

written guidance the former CFO provided to the payroll department.

As noted above, although NCYF had established plans for distributing staff bonuses during each

fiscal year covered by our audit, it failed to establish the required employee morale, health and

welfare policy required by OSD regulations relative to the provision of this compensation.

Further, we found a number of instances where NCYF did not even adhere to its established

plan relative to the distribution of these bonuses. Clearly, NCYFs administration of these

bonuses was questionable and not consistent with the requirements of state regulations.


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Rec om m end a t i o n The OSA recognizes that staff bonuses, if properly administered, are an effective means of

recognizing exceptional performance and improving staff morale. However, in the instances

discussed above, NCYF did not adhere to OSD regulations in its administration of these

bonuses and in some instances did not even follow the distribution plan relative to the provision

of these bonuses. In order to address our concerns relative to this matter, NCYF should remit

to the Commonwealth, the $20,293 in bonus payments made to its staff that were both not done

in accordance with OSD regulation or its established distribution plan. Further, OSD should

review this matter and determine how much of the remaining $898,129 in funds that NCYF

used to provide these bonuses, should be recovered by the Commonwealth. In the future, if

NCYF wants to award employee bonuses, its Board of Directors must develop and implement a

policy that is consistent with OSDs UFR Auditors Compliance Supplement that allows for the

provision of these payments. Also, NCYFs Board should vote to authorize all future employee

bonuses, including those made to NCYFs senior management staff, in order to fulfill its

fiduciary responsibilities to the organization, the organizations donors, and the Commonwealth.


The Draft Report does not challenge the reasonableness of amounts paid by the Centeras bonuses in fiscal year 2006, and it acknowledges that the Center developed a plansetting forth the Centers bonus program. The Draft Report nonetheless criticizes theCenters payments on the grounds that they were not approved by the Centers Board ofDirectors. It is perfectly appropriate for the Board of Directors of the Center to leave tomanagement the award[ing] of bonuses, especially in the ranges involved in this case.For all intents and purposes, these bonuses amounted to modest compensationadjustments that did not have the longer-term effects of salary increases. The fact thatin one case the amount in question was paid over time as a salary increase is of noconsequence. The key consideration [is] whether the dollar amounts in question werereasonable, and the Draft Report does not raise any issue in that regard.

The Draft Report claims generally that the Attorney Generals guide for Board Members

of Charitable Organizations requires the Board of a charitable organization to determinebonus uses for executive directors of the organization and other senior managers. ThatGuide states in its Introduction that this guide is not intended to prescribe the exactmanner in which a Massachusetts public charity board must function. The authorizationstandard for the conduct of the director of Massachusetts non-profit corporations such asthe Center is set forth in Massachusetts General Laws, Chapter 180, Section 6C: A

directorshall perform his duties as suchin good faith and in a manner he reasonablybelieves to be in the best interests of the corporation, and with such care as an ordinarilyprudent person in a like position with respect to a similar corporation organized under


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this chapter would use under similar circumstances. This standard provides broaddiscretion to the Board of the Center in managing the organizations affairs. It is wellwithin the Boards discretion to delegate to the chief executive officer authority to setcompensation of employees (other than the Executive Director), as a part of moregeneral authority to deal with human resources matters. As noted in the Draft Report,the senior management reported to the Board as to its plan.

Aud i to r s Rep l yIn its response, NCYF asserts that our audit does not challenge the reasonableness of amounts

paid by NCYF as bonuses in fiscal year 2006. However, we did not analyze individual bonus

amounts for fiscal year 2006 because we determined that NCYFs bonus payments in total were

not made in accordance with OSDs UFR Auditors Compliance Supplement. NCYF asserts

that the bonuses paid to its employees, and the delegation of setting criteria of bonus awards to

senior management, were reasonable; however, against the advice of its own Human Relations

Director, a bonus totaling $1,136 was improperly paid to a Senior Case Manager. This Senior

Case Manager had agreed to a specific compensation package upon ceasing employment in June,

and did not qualify for any bonus according to senior managements criteria for 2008 bonuses.

Furthermore, as stated in our report, during this fiscal year, NCYF did not have a functioning

employee evaluation system and simply provided bonuses to all employees based upon

employment longevity. Consequently, the plan neither represents an established policy of

NCYF as required by OSDs UFR Auditors Compliance Supplement, nor provides a valid basis

for NCYFs fiscal year 2006 bonus awards. While we acknowledge that NCYF had developed

an informal employee bonus plan for fiscal year 2006, the plan did not constitute a written

employee morale, health, and welfare policy, which makes available bonuses to all employees

based upon exceptional employee performance as required by the OSDs UFR Auditors

Compliance Supplement. To meet this requirement, the Board would have had to vote to adopt

the plan, and incorporate the adopted plan into the Centers operating policies and procedures.

The Centers Board did not approve a Bonus/Policy Procedure until its June 23, 2010 meeting.

In addition, NCYF did not have a functioning employee performance appraisal system during

the audit period upon which to base employee bonuses. Consequently, contrary to the OSDs

UFR Auditors Compliance Supplement, the Center awarded its bonuses based upon an

employees length of employment, and not exceptional performance.

In its response, NCYF contends that it is well within the Boards discretion to delegate to

NCYFs Chief Executive Officer the authority to set compensation of employees (other than the


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Executive Director) as part of a more general authority to deal with human resources matters.

NCYF bases its contention upon the provisions of Chapter 180, Section 6C, of the General

Laws, which states, in part, the following:

A director, officer or incorporator of a corporation shall perform his duties as such, including,in the case of a director, his duties as a member of a committee of the Board upon which hemay serve, in good faith and in a manner he reasonably believes to be in the best interest ofthe corporation, and with such care as an ordinarily prudent person in a like position withrespect to a similar corporation organized under this chapter would use under similarcircumstances.

We agree that NCYFs Board is not responsible for setting compensation for non-senior

management employees. However, in determining the Boards responsibility for setting the

Executive Directors and senior managements compensation, one must consider both Chapter

180, Section 6C, of the General Laws and the Massachusetts Attorney Generals Office Guide

for Board Members of Charitable Organizations (Guide). In this regard, Chapter 180, Section

6C, of the General Laws provides a very broad framework under which Board members

perform their duties and responsibilities. The Guide, which supplements Chapter 180, Section

6C, provides detailed guidance for Board members to follow when carrying out their important

duties and responsibilities. Relative to executive compensation, the Guide clearly specifies that

board members of charitable organizations are responsible for setting the compensation of

CEOs and other senior managers. In short, the Guide states the board of a charitable

organizations process for setting executive compensation, the amount of such compensation,

and the terms of such compensation should all be well documented, approved by the full Board,

and be sensitive to public concerns and regulatory oversight.

In its response, NCYF states that the fact that in one case the amount in question was paid

over time as a salary increase is of no consequence. However, NCYFs comments on this

matter are inconsistent with the provisions of 808 Code of Massachusetts Regulations (CMR)

1.02 and Office of Management and Budget (OMB) Circular NO. A-122. Specifically, 808 CMR

1.02 states operating costs shall be considered reasonably incurred only if they are reasonable

and allocable using the standards contained in OMB Circular A-122 or A-21, or successors

thereto. Further, OMB Circular No. A-122 states, in part, a cost is allocable to a federal award

if it is treated consistently with other costs incurred for the same purpose and like circumstances.

Consequently, because NCYF did not treat all employee bonuses in a consistent manner (one


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time payments versus salary increases), NCYF failed to adhere to both state and federal

requirements. Contrary to NCYFs assertion, this inconsistent treatment of bonus payments in

our opinion does represent a matter of significant consequence.

3. NCYF IMPROPERLY UTILIZED STATE PROGRAM REVENUES TOTALING $406,360 TO FUNDOUT-OF-STATE PROGRAMSAccording to state regulations revenue NCYF receives under its contracts with Massachusetts

state agencies may only pay for expenses associated with the operation of the programs that are

funded by these contracts. In addition, allowable surplus state revenues retained by providers

are public revenues and therefore they may only be expended for activities and programs that are

in keeping with the Massachusetts charitable purposes of the provider organization according to

the Auditors Compliance Supplement issued by the states Operational Services Division

pursuant to 808 CMR 1.00. Despite these requirements, our audit identified that between fiscal

years 2006 and 2009, NCYF used revenues totaling $406,360 that it received under its

Massachusetts contracts to fund losses that it incurred within programs it operated in the state

of Connecticut. Since this $406,360 did not benefit consumers in NCYFs Massachusetts

programs, NCYFs use of these contract revenues for these purposes represents unreasonable

and unallowable costs against its state contracts.

According to OSD regulations, state contract revenues should only be used to pay for expenses

incurred in providing services to consumers in state-funded programs. In this regard, 808 CMR

1.02, promulgated by OSD, defines reimbursable operating costs as follows:

Those costs reasonably incurred in providing the services described in the contract.Operating costs shall be considered reasonably incurred only if they are reasonable and

allocable using the standards contained in Federal Office of Management and Budget CircularA-122 or A-21, or successors thereto.

Further, 808 CMR 1.05 promulgated by OSD prohibits state contract revenues to be used for

unreasonable expenses, defined as follows:

Any costs not determined to be Reimbursable Operating Costs as defined in 808 CMR 1.02 orany amount paid for goods or services which is greater than either the market price or theamount paid by comparable Departments or other governmental units within or outside ofthe Commonwealth.


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In addition, 808 CMR 1.03(7) restricts the use of surpluses that non-profit contractors

accumulate from the revenues and expenses associated with services provided to state

purchasing departments, as follows:

Surpluses may be used by the Contractor for any of its established charitable purposes,provided that no portion of the surplus may be used for any nonreimbursable cost set forth in808 1.05, the free care prohibition excepted.

OSD issued further guidance on the use of surpluses retained by providers within its UFR

Auditors Compliance Supplement. Specifically, the Supplement states the following:

The surplus revenues retained by the providers are public revenues and therefore their use islimited in the following manner:

The revenues may only be expended for activities and programs that are inkeeping with the Massachusetts charitable purposes of the provider organization.

The revenues may not be spent on items that are prohibited by state or federallaw andregulation, such as nonreimbursable state and federal costs set forth in808 CMR 1.15, including depreciation expense for the purchase of capital items(except free care).

While NCYF primarily serves Massachusetts children and adolescents who suffer from

emotional and behavioral issues, it also operates three residential treatment programs within the

state of Connecticut. NCYF opened the first of these three programs during fiscal year 2006

and since that time, NCYF has opened two additional programs. Each out-of-state program has

incurred significant financial losses. Specifically, for fiscal years 2006 through 2009, NCYF

received client service fees from the state of Connecticut that totaled $5,840,839. However,

during the same four-year period, NCYF incurred operating expenses within its out-of-state

programs that totaled $6,247,199. Consequently, NCYFs combined out-of-state program losses

total $406,360 through fiscal year 2009. The table below details the losses that NCYF has

incurred within its out-of-state programs through fiscal year 2009:

Fiscal Year Ct. Locations Expenses Revenue

2009

Results

Mansfield $999,158 $950,527 ($48,631)Lebanon 964,194 949,525 (14,669)

Chaplin 944,913 949,742 4,829

$2,908,265 $2,849,794 ($58,471)

2008 Mansfield $1,053,025 $948,413 ($104,612)

Lebanon 943,815 871,624 (72,191)

Chaplin 209,612 170,708 (38,904)

$2,206,452 $1,990,745 ($215,707)


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Fiscal Year Ct. Locations Expenses Revenue Results

2007 Mansfield $900,143 $841,935 ($58,208)

Lebanon 120,437 91,590 (28,847)

$1,020,580 $933,525 ($87,055)

2006 Mansfield $111,902 $66,775 ($45,127)

$111,902 66,775 ($45,127)

Totals $6,247,199 $5,840,839 ($406,360)

According to NCYFs financial statements, except for a $217 donation, its Connecticut

programs were funded by client service fees that were provided by the state of Connecticut but

were insufficient to cover the expenses associated with the operation of these programs. As

such, NCYF required an alternative source of revenue in order to keep operating its out-of-state

programs. Consequently, NCYF used accumulated surpluses from its Massachusetts state-

funded programs. However, since the expenses related to the operation of its out-of-state

programs in no way benefited NCYFs Massachusetts consumers, the $406,360 in accumulated

program surpluses that NCYF used to pay for these expenses represents unreasonable costs

based upon state regulations and should be refunded to the Commonwealth.


from NCYF the $406,360 in state program revenues that it used to offset costs associated with

its out-of-state programs. In the future, NCYF should take measures to ensure that no

Massachusetts contract revenues are used for these purposes.


Regulation 808 CMR 1.03(7) provides that surpluses as determined under that section

may be used by the Contractor for any of its established charitable purposes Thepurposes of the Center, as set forth in its articles of organization, are as follows:

To operate exclusively for charitable and educational purposes, including butnot limited to charitable and educational purposes for young persons in theConnecticut Valley region.

In its Connecticut programs, the Center provided services identical to those provided inthe Centers programs serving Massachusetts residents; namely, therapeutic residential


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services for youths. All of those programs directly furthered the Centers charitablepurposes. Regulation 808 CMR 1.03(7) specifies that surplus funds may not be appliedto nonreimbursable costs as set forth in regulation 808 CMR 1.05, the free careprohibition excepted. In effect, the Center used some of its accumulated retainedsurplus to provide free care to Connecticut clients.

While the Centers losses on its Connecticut programs totaled $406,360, of that amountonly $216,618 represents a cash expenditure. The balance represents depreciation. TheCenters retained surplus is a cash item. At most the Centers cash expenditureconstitutes an impermissible use of the Centers surplus.

Aud i to r s Rep l yContrary to NCYFs response, 808 CMR 1.03(7) and the Auditors Compliance Supplement

prohibit it from using its accumulated surpluses from Massachusetts-funded programs to pay for

out-of-state program expenses. While 808 CMR 1.03(7) indicates that accumulated surpluses

may be used to provide free care, the Auditors Compliance Supplement mandates that the

recipients of the free care must be Massachusetts residents, and not Connecticut residents. As

previously stated, OSD, under 808 CMR 1.00, issued the OSDs UFR Auditors Compliance

Supplement. Within this document, OSD specifies that surplus revenues retained by providers

are public revenuesand therefore their use is limited in the following manner:The revenues may only be expended for activities and programs that are in keeping withtheMassachuse t t s cha r i t ab l e pu rposes of the provider organization.

In addition, as noted in our report, 808 CMR 1.02 defines reimbursable operating costs as those

costs incurred in providing the services described in the vendors contract with the state. The

services provided for Connecticut residents were not described in NCYFs Massachusetts

contracts. As such, NCYF should not have used any surpluses it accumulated from state

programs to offset funding deficiencies within its Connecticut-based programs.

We agree with NCYF that 808 CMR 1.04 requires that non-profit contractors maintain books

and records in accordance with generally accepted accounting principles. In this regard, under

808 CMR 1.00, OSD issued the UFR Audit & Preparation Manual (Manual). Within the

Manual, OSD provides general instructions for the preparation of the UFR as follows:

The basic financial statements must be completed in accordance with generally acceptedaccounting principles (GAAP), including the accrual basis (not cash basis) of accounting.Supplemental schedules must also be completed in accordance with GAAP except where a

more restrictive accounting treatment is specifically required by the Account Definition. Thesupplemental information and the manner of its presentation in the organizations


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supplemental schedules must not be materially inconsistent with the information or themanner of its presentation appearing in the basic financial statements of the UFR.

Since OSD requires that non-profit contractors utilize the accrual basis of accounting to prepare

their UFRs, NCYFs discussion of cash basis accounting is irrelevant to this matter.

4. NCYF DID NOT PROPERLY REPORT UNALLOWABLE SEVERANCE PAYMENTS TOTALING$148,098 IN THE FINANCIAL STATEMENTS IT FILED WITH THE COMMONWEALTH

Between fiscal years 2005 and 2009, NCYF provided severance pay to nine employees that

totaled $198,280. The individual severance amounts, which included a combination of extended

medical insurance coverage, bonuses, and salary payments, ranged in amounts from $5,471 to

$53,784. However, NCYFs policies and procedures did not provide for the provision of

severance pay. Consequently, based upon state and federal regulations, these payments represent

nonreimbursable costs to the Commonwealth. In addition, our analysis of these nine severance

packages identified significant disparities between the severance compensation that was provided

to these individuals. For example, when a former Director of Program Services left NCYF

during fiscal year 2008, she received six months in paid medical insurance benefits ($5,741) as

her severance compensation. In contrast, when a former Chief Financial Officer left NCYF

during fiscal year 2009, he received four months of his salary ($34,961) plus a $5,000 bonus as

his severance compensation. Finally, we found that even though the severance payments in

question were nonreimbursable expenses, NCYF only disclosed the severance payments it made

during fiscal year 2009 ($39,961) and a portion of its fiscal year 2007 payments ($10,221) as

nonreimbursable expenses during these fiscal years. NCYF reported the remaining $148,098 in

the financial statements it filed with the Commonwealth as allowable personnel costs rather than

nonreimbursable costs.

According to 808 CMR 1.02, operating costs shall be considered reasonably incurred only if

they are reasonable and allocable using the standards contained in OMB Circular A-122 or A-21.

Circular A-122 specifies that compensation for personal services includes all compensation paid

currently or accrued by the organization for services of employees rendered during the award

period. Compensation for personal services includes severance pay, commonly referred to as

dismissal wages. Moreover, A-122 specifies that the costs of such compensation are allowable to

the extent that total compensation to individual employees is reasonable for the services

rendered and conforms to the established policy of the organization consistently applied.


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NCYFs Termination of Employment Policy, contained within its Employee Handbook, does

not provide for severance pay for terminated employees. Therefore, NCYFs severance

payments directly violated state and federal regulations as well as its own policies and

procedures.

NCYF has developed an Employee Handbook (Handbook) that details its personnel policies

and procedures. One section of the Handbook, Termination of Employment, states that

terminated employees will receive: (1) their final pay in accordance with applicable state law; (b)

all accrued, vested benefits that are due and payable at termination; and (c) some benefits may be

continued at the employees expense if the employee so chooses. However, the Handbook does

not identify severance payments as being available to any NCYF employee.

Despite the lack of any provisions providing for severance payments, we found that between

fiscal years 2005 and 2009, NCYF provided nine members of its administrative staff with

severance payments, as indicated in the table below:

Fiscal YearEmployment Ended

Position Severance Payments

2005

Severance Description

Chief Financial Officer $20,192 3-months salary

914 13-weeks Medical Insurance

2005 Executive Director 14,987 2-months salary

1,455 2-months Medical Insurance

2006 Associate Executive Director 49,187 6-months salary

4,597 6-months Medical Insurance

2007 Director of Family BasedServices

15,935 10-weeks salary

1,125 1.5-months Medical Insurance

2007 Assistant Director of FosterCare

23,582 16-weeks salary

2,250 Bonus

2007 Shift Supervisor 10,221 3-months salary

2008 Director of Foster Care 8,403 5-weeks salary

2008 Director of Program Services 5,471 6-months Medical Benefits

2009 Chief Financial Officer 34,961 4-months salary

$5,000 Bonus

Total $198,280

Since NCYF does not have an established employee policy authorizing severance payments in

accordance with 808 CMR 1.02, the severance payments NCYF made during the audit period


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represent nonreimbursable costs to the Commonwealth. We also identified other problems with

these severance payments which are detailed in the sections below.

D ispa r i t ie s i n Seve rance Pack agesOur analysis of the nine severance packages identified significant disparities from one severance

package to the next. For example, during fiscal year 2005, NCYFs Executive Director and

Chief Financial Officer terminated their employment with NCYF. The Executive Directors

severance agreement, dated March 29, 2005, specified that he would receive two months of his

salary in severance pay. The Chief Financial Officers severance agreement, dated November 23,

2004, provided for him to receive three months of his salary as severance pay. In addition, as

part of the Executive Directors and Chief Financial Officers severance agreements, NCYF

agreed to continue paying their health insurance costs for two months and three months,

respectively.

Seve ran c e P a ym en t s N o t P r op e r ly R ep o r te d t o Com m onw ea l th We also found that NCYF did not accurately report to the Commonwealth these severance

payments. As previously noted, 808 CMR 1.00 requires human service providers such as NCYF

to annually submit financial statements (UFRs) to OSD. As part of their UFR submissions,

human service contractors must identify all nonreimbursable state and federal expenses as well

as non-state contract revenues that were available to defray these costs. However, even thoughthe severance payments in question were clearly nonreimbursable expenses, NCYF only

disclosed two of the nine severance payments totaling $50,182 as being nonreimbursable

expenses during the audit period. NCYF reported the remaining $148,098, or 75%, in its UFRs

as allowable personnel costs rather than nonreimbursable costs. Consequently, contrary to 808

CMR 1.00, NCYF used $148,098 of state program revenues to fund the majority of the

nonreimbursable severance payments it made during the audit period.

During our audit, we discussed this matter with NCYFs Attorney, who provided us with thefollowing comments:

She acknowledged that NCYFs Employee Handbook does not contain any provisionauthorizing severance payments.


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The Board of Directors, which met in Executive Session to discuss the severance payments,did not maintain minutes detailing their discussions and approval of the payments.

The Board of Directors, through the Executive Director, requested that the HumanResource Attorney outline the potential legal liability in each case.

Rather than expose NCYF to litigation and potential legal liability, the Board of Directorsopted to award severance payments to resolve these matters.


from NCYF the $148,098 in state contract revenues that NCYF used to provide severance

compensation to certain staff members during our audit period. In the future, if NCYF wants to

make severance payments available to all of its employees, it should establish a policy consistent

with state and federal regulations. Finally, NCYF should amend its UFRs to properly account

for these nonreimbursable expenses and in the future, take measure to ensure that all

nonreimbursable costs, including staff severance payments, are properly reported to OSD.


Amounts paid by the Center in its fiscal years 2005-2009 constituted severancepayments. Each was negotiated individually, and each reflected the reasonable

judgment of the Board of Directors of the Center, based upon legal advice, as to whetherand in what amount, a severance payment should be made. As the Draft Report noted,the Center has acknowledged in its UFRs for fiscal years 2007 and 2009 that a total of$50,182 in payments was not reimbursable. However, the Center had ample

unrestricted assets in the years in question to cover these costs, so no amount isrecoverable by the Commonwealth.

Circular A-122 provides, in substance, that severance pay is allowable if it is requiredunder particular circumstances, one of which is circumstances of the particularemployment. The Draft Report acknowledges that the Centers Human Relations

Attorney explained to the [state auditor] that each package was separately approved bythe Centers Board of Directors on the basis of advice by counsel as to risks of liability in

each case. The Boards decisions reflected the circumstances of employment in eachcase.

The Draft Report cites the Centers Employee Handbook, which deals (in Part 7) withTermination of Employment. That Section addresses payment upon termination of anemployee but does not contain any provision for severance payments, for good reason.The Center does not provide severance payments as a general rule. Rather, itapproaches the subject as one of risk-management. Determinations were made on acase-by-case basis with the advice of counsel as appropriate, and the Center obtainedreleases of claims as appropriate.


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During the years in question, the Center maintained insurance providing coveragerelated to the Centers employment practices. In order to reduce premiums for thisinsurance, the Center agreed to a deductible of $25,000. The Centers payment, inreturn for releases as appropriate, of severance amounts constituted reimbursablepayments under Circular A-21(J)(25)(d) and Circular A-122, Attachment B(22)(a)(3).Those Circulars provide, in substance, that actual losses that could have been covered by

permissible insurance will not be allowable except to the extent those losses are notcovered under the terms of deductible clauses for insurance reflecting soundmanagement practice. In this case, the Center incurred costs that were of the typecovered by its employment practices insurance but were within the Centers deductible.

The Center established the terms of its insurance policy on the basis of its judgmentabout trade-offs between premiums and deductible amounts. These costs were

reimbursable under the applicable federal rules.

Aud i to r s Rep l yIn its response, NCYF indicates that each severance payment was negotiated individually,

reflected the reasonable judgment of the Board of Directors, and was based upon legal advice as

to whether and in what amount a severance payment should be made. However, even if this was

in fact the process that was followed in the awarding of these severance payments, this process is

not consistent with applicable state and federal requirements. Specifically, 808 CMR 1.02 and

OMB Circular A-122 require that severance payments be based upon an established policy of

the organization that is consistently applied. While NCYF has a Board-approved Termination

of Employment policy, this policy does not provide for severance payments. Additionally,

NCYF was not consistent in the manner in which it provid

Documents

Audit of Northeast Center for Youth and Families, Inc